Real Estate.

Sweet Home, Chicago? Not For Investors

Other Cities Move To The Forefront For Commercial Opportunities In The Midwest

September 23, 1993|By Steve Kerch, Tribune Staff Writer.

Investors looking for real estate opportunities in the Midwest may be best advised to get out of Chicago and head for a midsize market that offers more potential, a new study suggests.

The study, by the accounting firm of Kenneth Leventhal & Co., identified five key Midwest markets and 15 others across the country where the office, retail and industrial real estate sectors offer good growth potential and investment opportunity in the next three years or so.

"Now is the time to consider investment opportunities in certain relatively stable midsize markets. Overall, they were not excessively overbuilt in the '80s, and construction continues to be limited," said Dale Anne Reiss, managing partner in Leventhal's Chicago/Midwest office.

"The study shows that many midsize markets overlooked in the '80s will reap benefits in the '90s, thanks to currently deflated prices and improving relationships between the current supply of real estate and the growing demand," Reiss said.

Prices near the bottom

Reiss said prices for most types of commercial real estate "are at or near bottom," and with new projects scarce, the coming increases in demand "should lead to higher rental rates and improved cash flows."

The study takes into account factors such as market supply and demand, adequacy of infrastructure, business and development climates, housing affordability and environmental considerations.

"Investing in commercial real estate is no slam dunk," the study warns. "It is a complex situation and warrants thorough investigation. The last five years have been a fiasco for many real estate investors, including some of the best."

But the study said, "Now is the time to start looking around, not at all markets, but at selected ones."

Only three Midwestern cities-Cincinnati, Columbus and Minneapolis-were cited for the growth potential in the office market.

Leventhal analysts said Cincinnati was experiencing moderate growth fueled by escalating exports to Latin America and Asia, a trend the accounting firm said is likely to continue as Ohio continues to offer tax credits for companies that show export increases.

Columbus was cited for its diversified economy that "functions as a regional center for finance, business services, distribution and trade." The city's moderate cost structure also was deemed a plus for real estate investment.

In Minneapolis, solid growth and minimal additions to the office supply should result in a decrease in space availability, the study said. Minneapolis also appears to be recession-proof, researchers said.

Only five other markets outside the Midwest show any potential for office investment: Atlanta, Las Vegas, Orlando, Salt Lake City and Portland, Ore.

For the most part, office overbuilding in virtually every other city in the country has forced rents down to the point where landlords are lucky to be able to cover their taxes and operating expenses, a situation that leaves little cash to cover debt service and no money to provide a return on investment.

Industrial, retail outlook

On the industrial side, Indianapolis and Minneapolis are expected to lead the Midwest in investment opportunity, Leventhal said. Baltimore, Ft. Lauderdale, Las Vegas, Portland, Riverside, Calif., and Salt Lake City also offer opportunity.

Columbus, Indianapolis and Kansas City ranked best in terms of retail investment in the Midwest. Atlanta, Baltimore, Dallas, Denver and Orlando also look promising for retail. But for those looking at shopping centers as a place to put some cash, there is a caution.

"Because the retail industry is experiencing major changes in its merchandising methods, as witnessed by the move away from full-service facilities toward more focused outlets, this sector overall will experience increased vacancies in the near term," Reiss said.

The study also cautioned that "uncertainty exists regarding whether or not markets have bottomed out, whether they will further decline or whether they have already started to reverse. There will not be a national press conference or real estate convention called to herald the turnaround."

Also, while certain markets may show potential, "investment is expected to be limited to top-quality properties in prime locations that are very well managed and better able to withstand any unexpected additions to supply."

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Steve Kerch's columns appear in Real Estate on Sunday and in Your Money every other Thursday.